Ready For Retirement
How to Prepare for Retirement Within 5 Years: 401k, Savings & Investment Changes
Graham and his wife are in their early 50s and plan to retire in 5 years. He wonders if they should continue maxing out their 401ks, how their investments should change, and what they should do with savings accounts to best prepare for their retirement goals.
James addresses these questions, Graham’s biggest risk as he nears retirement, and potential tax strategies for him to employ.
Questions answered:
Which is a better tax strategy – tax gain harvesting or Roth conversions?
Do I need to have a dedicated emergency fund in cash?
Timestamps:
0:00 - Graham’s question
3:16 - The move from single position
5:43 - Identify biggest risk
8:00 - Tax gain harvesting and Roth conversions
12:14 - Tax strategy
15:14 - Two variables to consider
20:44 - Max out 401k plans?
22:07 - A question of tax
24:52 - Tax plan in action
26:44 - Concern about emergency savings
Create Your Custom Strategy ⬇️
Graham and his wife are in their early 50s and plan to retire in 5 years. He wonders if they should continue maxing out their 401ks, how their investments should change, and what they should do with savings accounts to best prepare for their retirement goals.
James addresses these questions, Graham’s biggest risk as he nears retirement, and potential tax strategies for him to employ.
Questions answered:
Which is a better tax strategy – tax gain harvesting or Roth conversions?
Do I need to have a dedicated emergency fund in cash?
Timestamps:
0:00 - Graham’s question
3:16 - The move from single position
5:43 - Identify biggest risk
8:00 - Tax gain harvesting and Roth conversions
12:14 - Tax strategy
15:14 - Two variables to consider
20:44 - Max out 401k plans?
22:07 - A question of tax
24:52 - Tax plan in action
26:44 - Concern about emergency savings
Create Your Custom Strategy ⬇️
On today's episode of Ready for Retirement, we're going to help Graham understand what he needs to do to prepare for retirement in the next four to five years. He has questions around whether he should continue maxing out his 401k, how his investment should start to change and what he should begin doing with savings accounts today to best prepare for his retirement. Let's jump right into his question. This is another episode of Ready for Retirement. I'm your host, james Canole, and I'm here to teach you how to get the most out of life with your money. And now on to the episode. Graham sent in a question and he said this I recently found your podcast and my wife and I are learning so much. We're both in our early fifties and we're looking to retire in the next four to five years. We're currently working full-time, bringing in about $320,000 per year combined. We both max out our 401k and invest an additional $40,000 per year that we put into a couple of index funds within a brokerage account, along with a smaller amount to our savings. We rent and we do not have any debt and we don't have any kids. Our portfolio is as follows $400,000 between our 401ks, $220,000 in IRAs from previous 401k rollovers, 95, $220,000 in IRAs from previous 401k rollovers $95,000 in a Roth IRA, $1.5 million in a joint brokerage account and $20,000 in high-yield savings. The brokerage account has a tech-heavy focus, with one stock comprising 60% of our portfolio. Starting this year, we took about 15% of the position as a capital gain and we invested it into an index fund at another firm. With our retirement age, we're planning to use our brokerage account optimizing tax gain harvesting, along with a bit of Roth conversions to live on until we're able to pull from other sources. We're thinking of leaving social security until age 65. We are budgeting $100,000 per year for retirement expenses, plus an additional $20,000 per year for travel, plus $18,000 for healthcare. We do plan to continue to move out of our single position, our concentrated position, over the next four to five years each year and place those proceeds into a more diversified index fund.
Speaker 1:Our question is should we continue to max out our 401ks at work? We don't have enough money in our emergency high yield savings to live on should the market take a downturn. Is it worth using the next few years to stash away enough to cover two years of living expenses? Should we need to adopt a guardrail strategy and leave our brokerage account intact. Thank you, graham. Well, graham, thank you very much for your question. Thank you to all of you, by the way, who are submitting questions. I know quite a number come in each week and I do review all of them and I try to prioritize the questions that the greatest number of people are asking something in a similar vein or the questions I think would be most appropriate for an episode here. So, graham, thank you for your question, as well as all of you who are asking others.
Speaker 1:Outside of the specific question that Graham asked, which is should we keep maxing 401ks or should we start to prioritize building up our emergency fund, there's some other things I want to point out or pull out of Graham's question, things that I think might even be of bigger priority to Graham and his wife's ability to retire. Those things are the biggest risk that I see to their plan that maybe isn't fully being appreciated here. Number two how do we prioritize different tax strategies, things like Roth conversions and tax gain harvesting, when they may conflict with one another in any given year? And then, number three should they keep maxing out their 401k plan or should they prioritize building up their emergency fund? But let's start with number one. I'm kind of viewing these in order of importance, of what I see if I was looking at this plan and, as always, none of this is intended to be advice. So to Graham, to anyone else, this should not be taken as direct advice, as much as a conversation of what types of things should you be looking at as you're exploring your finances, especially as you're preparing for retirement.
Speaker 1:So Graham says this. He says, quote we plan to continue to move out of our single position over the next four years each year and place those proceeds into a more diversified index fund. So I have no idea what specific stock that Graham and his wife own. What I do know is they have $1.5 million ina brokerage account and of that he said, 60% is in a single position or single stock. So what that means is $900,000 is in one specific stock, some type of tech stock. Now, my guess is that stock's probably done pretty well over the last number of years, just because tech stocks as a whole have done really, really well over the past number of years.
Speaker 1:But here's the thing when we start to see this, we know okay, too much in one stock, that equals risk, that risk equals bad. What we start to do is let's come up with a plan to sell out of that, and maybe we do that over the next number of years. And now, as we start to think about doing that, another risk pops up, and that risk is oh my goodness, look at this tax hit that we're going to face, especially if this is a stock that they purchased a while ago for a very low amount of money and now it's worth a lot of money $900,000. Yes, you know that it's risky to hold an individual stock, but now you're up against taxes and that tax bill you're going to face for selling it. So here's the challenge with that when we see that tax bill or that expected tax bill if we were to make a change that's right in front of us we know with certainty that we're going to be paying that tax bill, and that's going to hurt as soon as we start to sell that stock. What's actually the biggest risk, though, is not that tax bill. That tax bill is going to be there, and I'm not saying this because I don't think you should be wise and have a prudent tax strategy and maybe try to spread that out or minimize that as much as possible over time, but we mistakenly believe that that tax hit, that guaranteed tax hit if we sell now, is the biggest risk to our plan, when in fact the biggest risk to our plan is that stock, that $900,000 dropping by 40, 50, 60% or more and never really recovering. And now sometimes it's difficult to wrap our minds around. Okay, well, james, how likely is that actually going to be?
Speaker 1:Over the last decade, decade and a half, these things have only gone up in value, and that's right. They have only gone up in value for the most part over the last 10, 15 years or so. But there've been plenty of stocks, even over that decade and a half, and certainly plenty of stocks over longer periods of time that we'd look backwards, that have dropped in value 60, 70, 80% and have not recovered. So one of the things that we have to do is start to identify what is our biggest goal. That's the first thing that we want to do, and the biggest goal, it sounds like for Graham and his wife is how do we prepare for a secure retirement in four to five years? Great, what's the biggest risk to that goal?
Speaker 1:Taxes, I wouldn't say, are a risk to that goal, simply because they're going to happen. It's just a matter of? Are they going to happen over the next four to five years or are they going to happen more all at once? And yes, like I said, let's come up with a good tax strategy to minimize that to the greatest extent possible. But I wouldn't say it's a risk because it's going to happen regardless. It's definitely something that's more like a hurdle, something that we have to plan for. The biggest risk, that thing that could wipe us out, is that stock dropping in value. And as we look at that, what's going to hurt more? Paying 15, 20% taxes on the gains of a stock or potentially losing 40, 50, 60% of the entire amount, both what you initially purchased the stock for, plus those gains, and that amount never recovering.
Speaker 1:Why do I start with this and why am I really harping on this? Well, anything that has the capacity to increase, like tech stocks have, also has the capacity to decrease. We've seen this plenty of times before, as recently as 2022. Now, a lot of them has since recovered after a really down year for stocks, for tech stocks in 2022. But prior to that, there's many tech stocks, there's many stocks in general that just never really recovered.
Speaker 1:So I want to start, before we jump into 401k versus emergency fund versus alternative tax strategies. Start by understanding what is the biggest single risk to this plan, graham and Graham's wife. Well, it's this individual stock dropping in value 40, 50, 60 plus percent. That would have a far more devastating impact than would paying some of those taxes earlier. I mean, instead of spreading it out and again, I'm not recommending that you do this, because I don't know enough about your situation to make a recommendation or can I give recommendations over this podcast here? But that is what jumps out to me as saying. That's where my attention, that's where my folks would go first, before even starting to explore other things is how do we start by neutralizing risk in our plan to the greatest extent possible, and sometimes that means paying a heavier tax bill upfront just to make sure that we're in a position where we've minimized the impact that a market downturn or even a single stock downturn can have on the rest of our lives. The next thing I would want to look at from there is to start to prioritize different tax strategies. And now, with these tax strategies, most of these are going to be things that happen in retirement.
Speaker 1:Graham and his wife are working. They both have 401ks. When you're working in this W-2 position. There's only so many things you can do to decrease your tax bill. What's the low hanging fruit? Well, are you putting money into a 401k? If you have things like a health savings account or a flexible spending account, are you putting money in there? If you have charitable giving or mortgage interest or whatever the case might be, are you getting the proper deductions? But there's not a tremendous amount of tax planning you can do on the front end. That's not to say there's not tax planning, because there certainly is, but there's a handful of boxes that you want to make sure that you're checking. The tax planning for most people really comes into play when they're retired, and the two biggest things that I see as being potential tax strategies for Graham and his wife are Roth conversions and tax gain harvesting, and Graham said as much in his question. Here's the hard part. It's difficult to do both of these things in the same year. Here's a quick refresher on what tax gain harvesting is before I move forward.
Speaker 1:If you have a stock that you purchased and that stock went up in value, it doesn't have to be a stock. It could be a bond, it could be any type of investment, it could be a property. If you bought an asset, if you bought an investment and appreciated it in value, that is a gain. Now, if you have a gain, that is a long-term gain, meaning you've held that for over a year, you've held the initial investment for over a year. When you sell that, you get preferential tax treatment. Sell that, you get preferential tax treatment. You get taxed at long-term capital gain rates, which at the federal level are either 0%, 15% or 20%. Now there's other things above and beyond that, like state income taxes, like net investment income tax, but for the actual federal capital gain tax rates, long-term capital gain tax rates, it's either 0, 15, or 20%, so that zero sounds really nice.
Speaker 1:There's a way to sell something at a gain and pay 0% taxes. Yes, how that works is if you are filing taxes as married, filing jointly in your taxable income, so your adjusted gross income minus any deductions, if your taxable income is $94,050 or lower in 2024, any long-term gains that you're realizing or any qualified dividends that you're receiving under that threshold that you're realizing, or any qualified dividends that you're receiving under that threshold, you're not paying any taxes at the federal level. If you're single, for your tax status that number is $47,025. So if your taxable income is under $47,025 and you realize a long-term capital gain up until that amount, you are paying zero taxes. So here's the thing. That's a great strategy. If you've got a large brokerage account, or just any brokerage account, and you're saying I want to sell this and not to pay any taxes, well, when you're in retirement, typically you're in a lower tax bracket. Typically your income's lower, even if you're not actually sacrificing the things you're able to do. Maybe your expenses are lower, your tax bracket's lower, whatever the case might be. So you can do that.
Speaker 1:But the other tax strategy is Roth conversions. Now, with Roth conversions, you're saying if I have an IRA balance or 401k balance or a pre-tax retirement balance, how can I start to shift that money that I haven't paid taxes on yet, instead of letting that money continue to grow in this pre-tax balance and ultimately be distributed down the road, maybe at future higher tax rates, maybe when my required minimum distributions kick in and I'm forced to start taking money out? Well, can I start shifting those balances into my Roth IRA today? That's the concept for Roth conversion. Whatever amount you move from your traditional IRA to a Roth IRA, you're paying taxes at today's tax rates and that's at the ordinary income rate.
Speaker 1:The problem is, the more you do in Roth conversions, the more you're driving up your taxable income. As you drive up your taxable income, you're squeezing out your ability to do tax gain harvesting because obviously your income is higher. And as your income is higher, you start to exceed or you start to cross those thresholds at which you're no longer paying 0% taxes at the federal level for long-term capital gains, but you're paying 15% taxes or maybe even 20% if you're in a much higher tax bracket. So, as you can start to see, these are both great tax strategies, but they conflict with one another. If you're trying to do both in any given year, you're probably not able to do either exceptionally well. Now, there's some years that you might do both, but in many cases you want to try to prioritize one over the other and really this is where the concept of a really good tax strategy comes into play of when Graham and his wife retire.
Speaker 1:I know that in their early 50s they want to retire in four to five years. I don't know exactly how old they are, but let's assume that they retire at the age of, let's say, 57. Well, if they retire at 57, they have what you call a tax planning window where before required minimum distributions kick in at age 75 for them and before social security kicks in, maybe at 65 for them, like they said, maybe at 70, depending on how long they are delaying that. For they have a tax planning window where they're in a high tax bracket today because of their W-2 income. That high tax bracket is probably putting them in the 24% federal tax bracket, just looking at the $320,000 that they're making and then backing out the contributions to their 401k plans. So in looking at that, they may be on the 24% tax bracket today. That probably bumps up to them to the 28% tax bracket if current tax bracket sunset at the end of 2025. And so they're then 28% tax bracket by the time that they retire and then potentially their tax bracket drops way time that they retire and then potentially their tax bracket drops way down.
Speaker 1:They're living on that brokerage account. I don't know how much that brokerage account is gains and how much is what they originally put in, but depending on what that makeup is, they might be in a very low tax bracket. They might be in the 0% tax bracket, maybe in the 10% tax bracket. So again, this goes back to the concept of tax gain harvesting maybe in the 10% tax bracket. So again, this goes back to the concept of tax gain harvesting they could realize a decent amount of long-term gains and I realize again. I mean, look, if you bought Apple stock for $20,000 and now it's worth $100,000, you could sell the $100,000 if this is long-term gains, and that $80,000 of long-term gains, if that was your only income source, you wouldn't pay any taxes on that because married filing jointly if your taxable income is under $94,050, you're in the 0% federal capital gains tax bracket. So they were in the 28% tax bracket, let's assume, or they will be in the 28% tax bracket at the federal level I don't know what state they're in when they retire, then potentially in the 0% tax bracket, maybe the 10% bracket for the next several years.
Speaker 1:And then what happens down the road is social security kicks in. Well, social security does have some good tax treatment and that many states don't tax it. And even at federal level not more than 85% of your benefit is included in your taxable income. But that's going to bump your income up a little bit. So that's bumping up their tax bracket and then required minimum distributions will kick in and because of their age they don't have to take the required distribution until age 75. So that's not going to be for several years. But once that kicks in, it depends upon how large their IRA balance is. If they have a really large IRA balance at that time the required distributions might be pretty significant as well. So now, between the required minimum distribution, between their social security, between whatever dividends or interest or capital gains their brokerage account is throwing off, they're back up into a higher tax bracket most likely. So that tax planning window is a time between that they retire and when social security and or required minimum distributions kick in, they're probably going to be in a much lower tax bracket.
Speaker 1:The question is how do we prioritize tax gain harvesting versus Roth conversions? And there's not just a universal answer for everyone. It depends on so many different variables. But two of the bigger variables are what is the size of your traditional IRA or your pre-tax account balances today and what does your brokerage account look like? I'll use an extreme example If someone has $5 million in an IRA when they retire and nothing in a brokerage account, or even, say, $100,000 in a brokerage account, they're probably going to prioritize Roth conversions because the bigger risk to them is that $5 million and this is a good risk to have. But it's still a risk that $5 million continuing to grow and then spitting off really significant required distributions later on in life. That's going to push them into a pretty significant tax bracket.
Speaker 1:Versus another scenario where let's flip those numbers. Maybe now someone has $5 million in their brokerage account and only $100,000 in their traditional IRA. Well, in that scenario I'm probably prioritizing tax gain harvesting because I'm not too worried about the $100,000 growing too much. Let's say that quadruples. They get some great growth over the next several years. It quadruples, which is probably unrealistic, but let's just say that it did. That $100,000 turns to $400,000.
Speaker 1:The first year of a required distribution with a $400,000 portfolio give or take, your required distribution is probably about $15,000. That $15,000 probably isn't pushing you too significantly into another tax bracket. So that's where I'd probably look at the $5 million brokerage account and say what can we do to realize as much gains as possible in long-term gains under the 0% threshold? And probably at that level you're not able to realize all the gains under the 0% tax bracket. But I'm really prioritizing the brokerage account in that situation. How can we make this as tax efficient as possible? Because that's becoming the bigger potential risk to our plan of the taxation, of it being suboptimal, considering what we want to do.
Speaker 1:So as we look at Graham and his wife's situation, their numbers aren't as skewed, but they have $1.5 million in a brokerage account and about $620,000 combined in their 401ks. Now to both of these, they're going to make pretty significant contributions over the next number of years and in this case I'd probably want to prioritize that brokerage account. Not because the IRAs are insignificant, no, but at $620,000, it's a good balance to have. That's not inconsequential at all, but it's not a number that, if I look at them retiring potential age 57 and not having to take required minimum distributions until age 75, what is that? That's 18 years. They have a lot of years to get some conversions in and those conversions.
Speaker 1:The goal isn't to move all the money from your IRA to your Roth IRA. That's typically going to cost you more in taxes than you otherwise would have paid, but it's to get a pretty significant amount. It's to keep the pre-tax balance manageable so it never gets out of control and never starts forcing you to take all these distributions that are pushing you to much higher tax brackets that you didn't have to be in if you're just taking a better approach. So it's not enough and this is somewhat gut feeling. Really, you'd want to have an actual strategy where you project these numbers out, but it's not a number that stands out to me and says, oh, we have to get on Roth conversions immediately and prioritize that.
Speaker 1:As much as I'd want to say is there room to focus on some tax gain harvesting first, if for no other reason than the fact that their brokerage account balance seems pretty out of balance today, the balance seems way too heavily concentrated into stocks and specifically tech stocks, and one of the first things I'd want to look at is to say, okay, if you're going to retire in four to five years, where's income going to come from? Okay, if income is going to come from that brokerage account, do we have some reserves in there? Do we have some money that's not going to be subject to the ups and downs of the stock market, that we can plan to live on and that is going to probably push us in the direction of maybe even starting to make some of those changes today? So, to some degree, the extent that you do tax gain harvesting four to five years from now depends upon how much of that work wasn't done today. A lot of this work I'd probably want to do today. Not because there's tax benefits to sell some of those portfolio assets today. There's not. If you're in a $320,000 income level, you're above the 0% long-term capital gain 0% tax threshold.
Speaker 1:That being said, to me it'd be a greater priority to get the right allocation, to get the right investment mix in their brokerage account today, than it would be to say, hey, hold off for four to five years on this and don't make these changes until you retire, because you might be able to do so at lower tax brackets. That's true, that might save you a little bit of money in taxes, but you're also keeping yourself open or subjecting yourself to way more risk than you need to, because, as I mentioned at the beginning, the risk of a significant decline in that brokerage account balance is significantly greater than the risk of paying a bit more in taxes along the way to get the right allocation up front. So this is one of those things that's not easy just to say, oh, here's a perfect formula for how much do you prioritize Roth conversions versus how much do you prioritize long-term gain tax harvesting? But, needless to say, you want to look at the timeframe that you have to work in kind of that tax planning window like I discussed. You want to look at the balance of your IRA and the balance of your brokerage account and then you want to map out a strategy for based upon our specific goals, based upon the income we need to meet those goals. How should we be working this? And there's all kinds of other variables that fit into that as well, but that's a general approach for what you should be looking at. So those are two topics that Graham didn't ask specifically, but they're the things I'd work through first, the biggest risks of the plan and then the prioritization of different tax strategies.
Speaker 1:What Graham did ask is should they keep maxing out 401k plans? Well, here's the thing they should definitely be saving something. They're preparing for retirement in four to five years at a pretty young age, and so, yes, you want to save, you want to make sure that you're planning for something and for the most part, whether it's in a 401k or brokerage account, you can invest in similar funds. Now, in a brokerage account, you have way more optionality. You can invest in just about anything In a 401k. You don't really have that option, but for the most part, 401ks today are significantly better than they used to be in the past. But for the most part, you should have some relatively low cost options to own large company stocks in the US, small company stocks in the US, international companies, real estate bonds, etc. So, no, you're not going to have thousands and thousands of options, but hopefully, if it's a good plan, you have some core options that work well for what you should be invested in.
Speaker 1:So when you're choosing, should I invest in a brokerage account or in a 401k, as Graham did, it's not really an investment decision. It's not okay. Well, where can I get this specific investment? Because for the most part, you should be able to get somewhat similar investments, assuming it's a good 401k plan. Now, if it's not a good 401k plan, you don't have options. Then what I just said is irrelevant. Like it does matter. You do want to make sure that maybe you're prioritizing a place that you can actually get good investments.
Speaker 1:But I'm assuming for this question that Graham's got a good 401k. Really, what it comes down to is a tax question. It's a tax decision of if I'm investing my 401k versus investing my brokerage account. It's not because in one place I can access this fund and in the other place I can't. It's because one's going to be a better tax decision for me than the other will be. So the question is really should I pay taxes now, which is what they'd be doing if they prioritize just saving to a brokerage account or just saving to a high-yield savings account, because they're paying taxes on their income and using the after tax balance to save to brokerage or savings, or so they pay taxes later. That's what you're doing when you're investing in a pre-tax or traditional 401k plan. You're deferring the taxes that you otherwise would have paid today at the federal and state level and you're saying I'll pay these instead when I pull the money out of my 401k in retirement.
Speaker 1:Well, today and I don't know if they have any deductions, I'm guessing not, because they said that they're renting today unless they do a huge amount of charitable giving or unless they do a huge amount or have a huge amount of medical expenses, graham and his wife are probably taking a standard deduction. They would have to have quite a bit of expenses either on the charitable giving side or the medical expense side or something else to itemize. So assume the standard deduction on their $320,000 of combined income, even after backing out any of their pre-tax 401k contributions, they're probably in the 24% tax bracket. Well, in retirement, what tax bracket are they going to be in? This will help to inform do they do pre-tax today or do they do after-tax today If they're going to be in a lower tax in retirement or if they're going to be in a lower tax bracket in retirement, we probably want to take the tax deduction today and then pull that money out at a lower tax rate in the future.
Speaker 1:Well, we know that between the $100,000 that they want to live on, plus $20,000 for travel, plus $18,000 for medical, they want to live on $138,000 total after taxes in retirement. So what tax bracket will that put them in? Well, this is the hard question about retirement is I could tell you exactly what tax bracket that will be. If they said we need $138,000 of ordinary income but they don't, in retirement they get to make the decision of do we create that $138,000 of income? Maybe some from our high yield savings account has already been taxed, some from dividends, some from interest, some from capital gains, some from an IRA withdrawal, some from taking money from our brokerage accounts, the principle that we've already put in. Now, you're not typically making it that complicated, but all those things are taxed differently. So what will their tax bracket be? Well, the answer is it totally depends upon where they pull income from to create that $138,000 after taxes. That being said that, they could probably keep their income in the 10% to 12% tax bracket if they wanted to, especially if they're doing that thing that we talked about of maybe keeping income low to prioritize Roth conversions in some years, or keeping income low to prioritize tax gain harvesting in some years. So if you look at it and say, okay, well, you're in the 24% tax bracket today, which might become the 28% tax bracket by the time that you retire and in retirement and this is really where that tax plan comes into play maybe you'll be in the 12% bracket, the 15% bracket, which is what the 12% bracket will turn into in a couple of years. And no changes are made, probably would make sense to prioritize tax savings today at a higher rate.
Speaker 1:Now, the downside to 401k contributions is that money is not as accessible For them. I'm actually not worried at all. So typically with the 401k you can't take that money out until you're 59 and a half. Well, there's a couple of simple ways around that. The first is if you work at the company that has the 401k until the year in which you turn 55, you can start to pull money out of that 401k even if you retire before 59 and a half. So if Graham and his wife were working at 57 and they both have 401k plans at their company, well, they could draw from those 401k plans, still pay taxes, but they wouldn't be paying the 10% early distribution penalty if they kept those 401ks at their company. The second thing is, even if they didn't have the 401ks at their company and everything was in IRAs, well, there's a 72T distribution, substantially equal payments from your IRA. But the good news is they probably don't need to do either of those things Because they have such a significant brokerage account.
Speaker 1:In looking at this, unless something devastating happens to their brokerage account, like that stock that they're in goes to zero, they're probably going to have enough to meet all their needs in their brokerage account by the time that they retire, that they could just live on that and not have to tap into the 401ks. So I say this because in some cases it's yeah, you know what. You've got too much in your 401ks and you want to retire early, before 59 and a half. We need to start building this brokerage account balance. Some people might refer to it as like a bridge fund, that thing that you're going to live on between the time that you retire and actually start pulling money out of your 401k. But they've got that bridge fund, they've got that brokerage account, so I'm not too concerned about them not having that.
Speaker 1:To go to their question, part of the question was quote. We don't have enough in our emergency high yield savings to live off should the market take a downturn, end quote. Well, to me, this is what your brokerage account represents. In your working years, you have an emergency fund because if you lose your job, you no longer have income and you don't want to take money out of your 401ks, especially if you're under 59 and a half, because you're paying a penalty plus taxes. You don't want to have to drain your investment accounts because those are for your retirement. Well, when you're in retirement, that thing that's for retirement can now be used, and when you're in retirement and at a sufficient age, you're no longer paying the penalties to access that money like you would have in your 30s, 40s or early 50s. So no, they don't have a huge emergency fund.
Speaker 1:But, graham, I would encourage you to say look at your brokerage account as almost like an emergency fund. And even once you're 59 and a half or older or above 55, if you retire at the company, the other 401k even those investments kind of are like that emergency fund. Now, don't treat them like an emergency fund, but they're an emergency fund in the sense that you can access them if you need them. This is where starting to create the right investment strategy is what's going to insulate you from needing to have to have a dedicated emergency fund fully in cash. So, do you have enough money in reserve funds in the right account, maybe in the brokerage account, if that's what you're going to live on first to say, yeah, there is going to be a downturn at some point, and if that happens in my first or second or third year of retirement, not going to be happy about it. But I plan ahead. I can just draw money from these reserve funds in my brokerage account and not have to worry about it impacting my retirement. So, having the right investment strategy in the right asset location which isn't just tax driven. It's also driven by the order in which you're going to pull money out of different accounts. That should negate the need for an emergency fund in the traditional sense, like you would have needed it in your working years.
Speaker 1:So I know a lot of these things. We could go a lot deeper on, but just out of the respect for all of your time, I don't want to go too too deep onto all of these. I know I have separate episodes that kind of address each of these things separately, but grandma wanted to thank you for your question. I hope that was helpful. I want to thank all of you for taking the time to listen. Whether you're commuting, whether you're on a walk, whether you're at the gym, always appreciate you tuning in and spreading the news of what we're doing by sharing this podcast with friends, with family, with coworkers, with people that you think could benefit. So if you have anyone that you think could benefit from this episode, would appreciate you sharing it with them, would appreciate you leaving a review If you find this helpful at all, whether it's on Apple podcasts or Spotify. If you're listening on YouTube, make sure that you subscribe Tune along for more great content just like this. Thank you, as always for listening and I'll see you next time.
Speaker 1:Hey everyone, it's me again for the disclaimer. Please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed in this podcast, then go to rootfinancialpartnerscom and click start here, where you can schedule a call with one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember, nothing we discuss in this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.